Bank Bail-Ins – Depositors’ Worst Nightmare.  How You Could Lose Your Money In the Bank

by Robin Cornwell

Recommended ReadingRecent changes in the bail-in regime for troubled banks in the Western world may have important implications for taxpayers, bank creditors and bank customers.

Bank Bail-Ins – Depositors’ Worst Nightmare. How You Could Lose Your Money In the BankWhile confiscation by the government or banks may never happen, all you need to do is look at the numerous laws and infrastructure already in place. Banks that are going bankrupt will no longer receive emergency funds from governments or their agencies. Instead, the next source of money will be from within the bank itself.

This would begin at the common shareholder or equity capital level, then preferred equity of the bank, and finally, outstanding bank debentures would be converted to common equity. These instruments generally represent 10% to 15% of the total funding for any one individual bank. Then the real problems begin.

Bank deposits to be targeted as temporary loans from governments or central banks have been abandoned in order to protect the taxpayer, so the money to stabilize the banking sector during the next crisis will come out of your bank accounts. Uninsured personal, corporate and government deposits comprise the majority of total bank deposits.

Since the banks pay close to 0% on many deposit accounts, they can confiscate uninsured depositors’ funds should the economy crash again. Deposits (personal, corporate or government) do not belong to the depositor. Once a deposit has been made, the funds become a liability of the bank. The bank just issues you what amounts to an IOU. As far as the bank is concerned, your deposit is just another unsecured liability.

Cornwell concludes that, if you are receiving little economic return on your bank deposits and are burdened with uncertain risks including liquidity, you should not feel truly safe and comfortable about those deposits.

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